Friday, September 01, 2017

WDR 2017: Rethinking Governance for Development

More than 70 years after the Bretton Woods Conference that launched the World Bank and the International Monetary Fund, the international community continues to recognize that promoting sustained development requires taking seriously the underlying determinants related to governance. Future progress will require a new framework and new analytical tools to harness the growing evidence on what has worked and what has not.

Policies do not occur in a vacuum. Rather, they take place in complex political and social settings in which individuals and groups with unequal bargaining power interact within changing rules as they pursue conflicting interests. The World Development Report 2017: "Governance and the Law" shows that taking into account how the distribution of power in the policy arena enables or constrains institutions to effectively promote commitment, coordination, and cooperation is critical to ensuring progress toward achieving security, growth, and equity.

Past World Development Reports have shed light on how to solve some of the most challenging problems in key areas of development, such as jobs, gender equality, and risk management. This WDR is part of a trilogy of recent reports, alongside Mind, Society, and Behavior (2015) and Digital Dividends (2016), that examines how policy makers can make fuller use of behavioral, technological, and institutional instruments to improve state effectiveness for development. The WDR 2017starts by acknowledging that policies such as those to strengthen labor markets, overcome gender barriers, or prepare countries against shocks are often difficult to introduce and implement because certain groups in society who gain from the status quo may be powerful enough to resist the reforms needed to break the political equilibrium. Successful reforms thus are not just about “best practice.” They require adapting and adjusting institutional forms in ways that solve the specific commitment and collective action problems that stand in the way of pursuing further development.

Three guiding principles

The WDR 2017 proposes three simple principles to guide those thinking about reform. First, it is important to think not only about what form institutions should have, but also about the functions that institutions must perform—that is, think not only about the form of institutions but also about their functions.

Second, it is important to think that, although capacity building matters, how to use capacity and where to invest in capacity depend on the relative bargaining powers of actors—that is, think not only about the capacity building but also about power asymmetries. Third, it is important to think that in order to achieve the rule of law, countries must first strengthen the different roles of law to enhance contestability, change incentives, and reshape preferences—that is, think not only about the rule of law but also about the role of law. (Table 1)

Table 1: Three principles for rethinking governance for development

When one is facing a specific policy challenge, what do these principles mean in practical terms? The Report identifies four key insights. Box 1 offers a simple diagnostic road map for bringing these insights more concretely into development programming in an effort to enhance effectiveness.

Box 1: The policy effectiveness cycle

The first challenge is to identify the underlying functional problem. Diagnostic approaches should home in on the specific commitment, coordination, and cooperation problems that stand in the way of achieving socially desirable outcomes, and on the ways that power asymmetries in the policy arena constrain these functions. In addition to constraints that are typically considered—such as physical and administrative capacity—policies may still be ineffective if groups with enough bargaining power have no incentives to pursue adoption or implementation. Taking into account power asymmetries means focusing on implementable (if not necessarily ideal) policies that can generate incremental progress toward inclusive growth and equitable development.

The second challenge is to identify the different levers of change that can help reshape the policy arena to expand the set of policies that can be implemented. Instead of taking the existing policy-making environment as a given, reformers would analyze how to lift the existing constraints to expand the space of what is politically feasible. Different levels of change can contribute to this shift. In looking at the contestability of the policy arena, reformers would take into account that incentives, as well as the preferences and beliefs of actors, are instrumental to understanding what agreements are feasible.

The third challenge is to identify the relevant interventions or changes in rules that best solve the specific functional challenges. When thinking about potential reforms of policies, actors will find it helpful to consider three “levels” of rules.[1] First-level rules, or R1, refer to specific policies (for example, the percentage of budget allocated to health care). Midlevel rules, R2, refer to organizational forms—such as the independency of the judiciary and central bank. Higher-level rules, R3, relate to “rules about changing rules”—namely, constitutional and electoral law. The “form” of policies is certainly not to be ruled out, but it is also crucial to think about their “function.” For example, beyond what a fiscal rule looks like, is a commitment to the rule credible? Some functional challenges may require a combination of reforms at all three rule levels. Finally, when designing and evaluating policies, anticipating opposition and considering potential unintended consequences must be part of the process (Box 2). Particularly when thinking about evaluation, it must be understood that trajectories may not be linear and thus assessment requires complex methods. Anticipating the changing balance of power around the reform process and adopting an adaptive approach, such as building coalitions in anticipation of the reform, can reduce the risk of reversal. Driving sustainable change requires considering the potential opportunities presented by elite interests, the opportunities for citizen collective action, and the role of international influences

Box 2: Lessons for reformers from the “rules game”: How is legitimacy ultimately built?

Creating conditions for adaptability

When can meaningful changes be made in the nature of governance? The development path is bumpy: shocks (such as terms of trade shocks and natural disasters) and gradual developments (such as urbanization or a growing middle class) alter the bargaining influence and preferences of actors, often benefiting one at the expense of another. In the face of these changes, governance arrangements that cannot accommodate new actors or demands may collapse. For example, violence traps are unstable bargains in which elites are highly polarized and the costs of losing control are great—when the stakes are sufficiently high—leading to violent conflict. Middle-income traps are situations in which interest groups, currently benefiting by extracting rents, have incentives to oppose new economic conditions and thus prevent efficiency-oriented reforms from happening, leading to an unproductive equilibrium. And inequality traps are a vicious cycle in which a high concentration of wealth translates into a disproportionate ability of those at the top of the distribution to influence the policy process in their favor and weakens the perception of fairness of those at the bottom of the distribution, who decide to opt out and not to contest in the policy arena.[2]

Adaptability to changes in the relative bargaining power, incentives, and preferences of different actors matters. Although the conditions that determine whether countries will adapt in ways that allow for more security, growth, and equity are contingent on history and are highly specific to the context, there are a few circumstances that make such adaptability more likely. In particular, when elites have reasons to find common ground, bargains can expand and adapt. When national institutions produce more effective leaders, countries are more capable of long-term development. When countries have more balanced, diversified, and organized business interests, they may be more capable of reforming institutions to adapt to changing economic conditions. Bargains that can adapt to evolving elite interests may nevertheless struggle to adapt to growing citizen demands. Regimes may lose legitimacy when decision-making processes are insufficiently inclusive, even when other development outcomes appear successful. For example, even effective growth policies may alienate the population if the public voice is lacking in the policy process. Overcoming delegitimization necessitates greater inclusion in the political process.

A focus on creating conditions, like those discussed in this Report, that prepare societies to adapt to their needs and demands change over time is critical to ensuring inclusive and sustainable development progress. Traditional development orthodoxy has so far emphasized the centrality of three assumptions in improving governance for development: the form of policies, the capacity to implement them, and the impersonal application of the rules. These assumptions have shaped the conventional solutions of the international community to the problem of policy failure in developing countries: first, invest in “good” laws and policies; second, build organizational and technical capacity to implement them; and third, strengthen the “rule of law.”WDR 2017 moves beyond these approaches and emphasizes that, although it is important to look at forms that have worked in other contexts, gauge what capacity is needed, and stress the importance of the rule of law, these aspects are not enough.

DISCLAIMER: This is an excerpt of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors and are not endorsed by The World Bank.

References:

[1] Acuña, C., and M. Tommasi. 1999. “Some Reflections on the Institutional Reforms Required for Latin America.” In Institutional Reforms, Growth and Human Development in Latin America. Conference volume. New Haven, CT: Yale Center for International and Area Studies